Friday, May 01, 2009

Why I'll Be Watching The Bank Index Next Week

The stock market has been enjoying a rather sizeable eight week rally which began on March 6th. As long as the S&P continues to move higher there is no reason to fight the current uptrend but there is reason to be cautious.

Above is a chart of the Bank Index (BKX) and in the lower pane is the S&P500. Notice on this last move up in the S&P the bank index did not make a new high. This sets up what is known as a bearish divergence and could cause problems for the stock market.

Notice what happened at the beginning of the year when the S&P made a new high, the bank index did not make a new high and the stock market subsequently took a tumble. Well we are seeing the exact same scenario take place right now. The bank index is diverging from the rest of the market which means we may see stocks sell off.

I consider the bank index to be one of the leading groups for the overall direction of the stock market which adds that much more significance to the divergence we are currently seeing. If the banks begin to roll over next week, it is quite possible we will also see the S&P head south as well. Sell in May and go away? I'm not going anywhere, there may be a short trade knocking at my door!


Anonymous said...

I guess you did notice that coil in the BKX!!! Very bearish sign for the market I think although the commodities could take us higher as it has in the past (although I feel as though that is the most unlikely scenario)... Bought calls on the FAZ and bought the underlying as well... Good eye my friend... I think the BKX takes us back down... Sentiment has become unbelievavbly bullish as of late (contrarian indicator)... Additionally, the stress tests are not all that stressful... Banks are ok as long as unemployment stays below 8.9% (currently 8.7) and as long as GDP does not contract more than 3.3% on the year... Since it contracted over 6% on the first quarter alone, this would mean we need to see GDP grow over the remaining course of the year... That, I believe is utterly impossible... Minumum retest of 750-780, here we come!!!

Anonymous said...

The banks had a big run up which has not been matched by the rest of the markets. They will play catch up IMO . Your other posts point out that oil may be ready to go up while gold is going down. This to me is saying that the Chinese are spending money on commodities but the overarching trend is still deflationary which means the the rally will eventually fail and find a lower low. But Elliott wave analysis says that we have done the a and b parts of the rally and still have a C wave upward to go through. Looking at things like BNI and NOC and others it does appear that we have started to break out again. Still a couple days too early to tell but if your S+P 880 resistance is broken out on a closing basis then I think the Elliott wave guys are right and we will get another 6-8 weeks of rally before the big lawnmower comes in to mow down all those green shoots. At that point the longs will turn green and say "SHOOT" as all the gains from the Chinese driven stimulus evaporates. The US stimulus isn't making it into the markets so it can nearly be ignored. Plus, it's all debt driven whereas the Chinese stimulus is spending savings/earned money.


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